International Traffic in Arms Regulations: Dual Nationals and Third-Country Nationals Employed by End-Users, 28174-28178 [2011-11697]

Agencies

• DEPARTMENT OF STATE

[Federal Register Volume 76, Number 94 (Monday, May 16, 2011)]
[Rules and Regulations]
[Pages 28174-28178]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11697]


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DEPARTMENT OF STATE

22 CFR Parts 120, 124, and 126

RIN 1400-AC68
[Public Notice: 7428]


International Traffic in Arms Regulations: Dual Nationals and 
Third-Country Nationals Employed by End-Users

AGENCY: Department of State.

ACTION: Final rule.

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SUMMARY: The Department of State is amending the International Traffic 
in Arms Regulations (ITAR) to establish a policy to address those who 
are unable to implement the exemption for intra-company, intra-
organization, and intra-government transfers of defense articles and 
defense services by approved end-users to dual national and third-
country nationals who are employees of such approved end-users. Prior 
to making transfers to certain dual national and third-country national 
employees under this policy, approved end-users must screen employees, 
make an affirmative decision to allow access, and maintain records of 
screening procedures to prevent diversion of ITAR-controlled technology 
for purposes other than those authorized by the applicable export 
license or other authorization.

DATES: Effective Date: This rule is effective August 15, 2011.

FOR FURTHER INFORMATION CONTACT: Director Charles B. Shotwell, Office 
of Defense Trade Controls Policy, Department of State, Telephone (202) 
663-2792 or Fax (202) 261-8199; E-mail DDTCResponseTeam@state.gov. 
ATTN: Regulatory Change, Dual and Third-Country Nationals.

SUPPLEMENTARY INFORMATION: This is part of the President's Export 
Control Reform effort. The Department of State is amending parts 124 
and 126 of the ITAR to reflect new policy regarding end-user employment 
of dual nationals and third-country nationals.
    As a part of the President's Task Force on Export Control Reform, 
the previous policy regarding the treatment of dual nationals and 
third-country nationals employed by approved end users was re-
evaluated. A proposed rule to

[[Page 28175]]

eliminate the separate licensing requirement for dual nationals and 
third-country nationals employed by licensed end-users was presented 
for public comment. The proposed rule had a comment period ending 
September 10, 2010. Thirty-two (32) parties filed comments recommending 
changes. Having thoroughly reviewed and evaluated the comments and the 
recommended changes, the Department has determined that it will, and 
hereby does, adopt the proposed rule, with changes noted and minor 
edits, and promulgates it as a final rule. The Department's evaluation 
of the written comments and recommendations follows.

Comment Analysis

    The overwhelming majority of commenting parties expressed 
dissatisfaction with the current rule regarding dual and third-country 
nationals, citing conflicts with foreign human rights laws as well as 
the burden of compliance, and welcomed the Directorate of Defense Trade 
Controls' (DDTC) efforts to reform current practice. One commenting 
party asserted that the ``tremendous administrative burden'' imposed on 
foreign end-users is exaggerated. By contrast, six inputs, including 
one from a group representing 21 nations, agreed with the assessment 
that current rules impose a large administrative burden, such as 
separate accounting and licensing of foreign nationals. Four commenting 
parties, including a major U.S. industry association, pointed out that 
the current rule is an extensive administrative burden for U.S. 
manufacturers and exporters, not just foreign end-users, and places 
U.S. companies at a disadvantage with foreign competitors.
    One commenting party recommended adding language to Sec.  126.18(a) 
to make clear that the exemption applies ``notwithstanding any other 
provisions of this Part'' to make clear that the limitations of the 
last sentence of Sec.  126.1(a), which would have conflicted with the 
intent of the proposed rule, did not apply. DDTC agreed and adopted 
this change.
    One commenting party argued that the current nationality (or place 
of birth) standard should stay in place, citing recent prosecutions of 
Chi Mak, Greg Chung, and Noshir Gowadia. We note that all three cases 
involve naturalized U.S. citizens, whose prosecutions would not have 
been affected by the proposed rule. It should also be pointed out that 
even if the proposed rule had applied to them, all three would have 
failed the substantive contacts test and, thus, could not have received 
the defense articles at issue under the exemption.
    Another commenting party criticized the concept of ``substantive 
contacts'' in favor of clarifying the definition of ``non-U.S.'' person 
or foreign person. We note that the current definition of foreign 
person in Sec.  120.16 is consistent with both U.S. law and usage in 
the proposed rule. Therefore, we find no need to change the definition 
of foreign person and do not adopt the recommendation.
    One commenting party, a large U.S. aerospace firm, argued that DDTC 
should return to its pre-1999 rules, where there was no additional 
licensing requirement for dual nationals or third-country nationals 
working for authorized end-users. This option was explored early on in 
the development of this proposed rule, but DDTC chose not to pursue 
that option any further due to policy implications outside of the 
Department of State.
    Ten commenting parties recommended that the exemption proposed in 
Sec.  126.18 be expanded to include ``defense services.'' The current 
proposal was limited to ``defense articles,'' which by the definition 
in Sec.  120.6 includes technical data. We note that the rule was 
intended to address concerns about restrictions on dual national and 
third-country national employees of licensed end-users and consignees 
who would have access to defense articles, which, as noted above, 
includes technical data per Sec.  120.6, within the scope of their 
employment. The intent of the rule was to create a policy for such 
transfers in a manner that would prevent diversions of such articles to 
unauthorized end-users. Thus, the proposed rule was limited to use of 
the defense article within a company and within the scope of the 
license in question. Defense services, on the other hand, cannot be 
``transferred'' within a company in the manner in which defense 
articles can. Rather, defense services are rendered to specific end-
users identified in the license or other authorization. As such, the 
defense services are rendered to the named company rather than the 
individual employees. In any event, if the contemplated defense service 
involves defense articles already licensed to the company, the proposed 
exemption would generally cover dual and third-country national 
employees receiving the defense service. We deem it neither necessary 
nor prudent to specifically add defense services to this rule and thus 
do not adopt the recommendation.
    One commenting party asserted that there was uncertainty regarding 
whether the exemption applied to academic institutions. This proposed 
rule is an incremental change in favor of foreign business entities, 
foreign governmental entities, and international organizations, 
recognizing internal incentives for the protection of export controlled 
articles and data. The Department of State is not prepared to extend 
the exemption to academic institutions at the present time.
    Ten commenting parties recommended that the current Sec.  124.16 
not be removed. That provision allows for a limited exception for 
access to unclassified defense articles exported in furtherance of or 
produced as a result of a Technical Assistance Agreement/Manufacturing 
License Agreement, retransfer of technical data and defense services to 
dual national and third-country national employees of licensed 
signatories that are nationals exclusively of NATO member states, EU 
member states, Australia, Japan, New Zealand, or Switzerland. A major 
concern was that the proposed rule, unlike Sec.  124.16, did not 
include approved sub-licensees. After careful consideration, we 
concurred with the recommendation to retain Sec.  124.16 and have 
amended the section to include workers who have long term employment 
relationships with licensed end-users, per a new definition to 
``regular employee'' added in part 120.
    One foreign governmental commenting party observed that there is a 
need to expand the exemption beyond the physical territories of the 
governmental end-user or international organization. For example, such 
would be required to facilitate repair of a disabled aircraft overseas. 
This change was adopted subject to a requirement that such operations 
are in the conduct of official business by the government or 
international organization and provided such activities are within the 
scope of the license.
    Nine commenting parties recommended the proposed rule apply to 
contract employees, not just ``bona fide, regular employees.'' The 
intent of the proposed rule was to recognize vested interests within 
companies, international organizations, and foreign governmental 
entities to carefully screen employees for purposes of trustworthiness. 
Full-time employment meets that criterion as it indicates a higher 
level of scrutiny and represents a long-term relationship with the 
entity at issue, as opposed to the transactional, temporary nature of 
the contractual arrangement. Furthermore, companies, international 
organizations, and foreign governmental entities bear significantly 
more legal responsibility for the acts of their regular employees than 
they do for

[[Page 28176]]

the acts of contactors. However, DDTC is prepared to narrowly extend 
this policy to workers who have long term employment relationships with 
licensed end-users, per a new definition to ``regular employee'' added 
in part 120.
    Several commenting parties recommended clarification of the meaning 
of ``substantive contacts.'' Many of the requests for clarification 
center around specific areas discussed below. One commenting party 
expressed concern that any employee with a family member in a 
proscribed country would automatically be disqualified. It is not 
DDTC's intent to deny access based solely upon relationships or 
contacts with family members in a context posing no risk of diversion. 
We note that contacts with government officials and agents of 
governments of Sec.  126.1(a) countries, be they family or not, would 
require higher scrutiny.
    Another commenting party expressed concern that any personal or 
business travel to a country listed in Sec.  126.1 would disqualify 
that person from access to a defense article. The intent of the 
proposed rule is not to automatically disqualify a person on the basis 
of such travel, where the travel does not involve contacts with foreign 
agents or proxies likely to lead to diversion of controlled data or 
articles. Instead, full disclosure about travel is required, which 
would be the basis of an assessment of diversion risk on a case-by-case 
basis.
    One commenting party objected to the limitation of the exemption to 
the country where the end-user is located, pointing out that 
international organizations operate in more than one country. We note 
that licenses for international organization end-users will specify the 
location(s) and country(ies) where the end-item will be utilized. 
Therefore, DDTC believes that transfers to locations (and end-users) 
within the scope of the license poses no problems. Any contemplated 
transfers beyond the authorized and licensed location(s) will require 
an additional license (or an amendment to an existing license), and is 
a prudent limitation on the rule. This rule is not intended to 
authorize unlimited transfers around the world for end-users with 
nominal connections throughout the globe.
    One commenting party recommended that the requirement for screening 
not apply to citizens (including dual nationals) and permanent 
residents of the host country. This approach would exclude from 
screening a large group of individuals who continue to maintain 
affiliation by citizenship with a third country (i.e., different than 
that of the authorized end-user). Though we agree that citizens who 
relinquish citizenship of the former country would not require 
screening, the nature of continuing relationships with the third 
country for those maintaining citizenship remains relevant, especially 
if the country is subject to restrictions in Sec.  126.1. In any event, 
this rule does not present foreign citizenship alone as a bar to access 
to ITAR controlled defense articles.
    Several commenting parties recommended clarification of whether the 
proposed rule would apply to both classified and unclassified data. In 
the absence of explicit inclusion, this rule will not apply to 
classified data. The word ``unclassified'' was added to the first 
sentence in Sec.  126.18(a) as a qualifier to make the point clearer. 
We note that the release of classified data to foreign persons is 
governed by separate National Disclosure directives and policies. To be 
clear, this rule is not a grant of a separate authority for the 
transfer of classified information.
    Several commenting parties expressed concern about the record-
keeping requirements, especially where local privacy laws may apply. We 
note that the records in question are intended for use by DDTC, a 
governmental entity for governmental use and not for public release. 
DDTC's function in this capacity is analogous to the exchange of 
information with cross-border law enforcement agencies that regularly 
receive and have a similar obligation to protect information subject to 
privacy laws.

Regulatory Analysis and Notices

Administrative Procedure Act

    The Department of State is of the opinion that restricting defense 
article exports is a foreign affairs function of the United States 
Government and that rules implementing this function are exempt from 
Sec.  553 (Rulemaking) and Sec.  554 (Adjudications) of the 
Administrative Procedure Act. Although the Department is of the opinion 
that this rule is exempt from the rulemaking provisions of the APA, the 
Department published this rule with a 60-day provision for public 
comment and without prejudice to its determination that restricting 
defense article exports is a foreign affairs function.

Regulatory Flexibility Act

    Since this amendment is not subject to the provisions of 5 U.S.C. 
Sec.  553(b), it does not require analysis under the Regulatory 
Flexibility Act.

Unfunded Mandates Reform Act of 1995

    This amendment does not involve a mandate that will result in the 
expenditure by State, local, and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more in any year and it 
will not significantly or uniquely affect small governments. Therefore, 
no actions were deemed necessary under the provisions of the Unfunded 
Mandates Reform Act of 1995.

Small Business Regulatory Enforcement Fairness Act of 1996

    This amendment has been found not to be a major rule within the 
meaning of the Small Business Regulatory Enforcement Fairness Act of 
1996.

Executive Orders 12372 and 13132

    This amendment will not have substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. Therefore, in accordance with Executive 
Order 13132, it is determined that this amendment does not have 
sufficient federalism implications to require consultations or warrant 
the preparation of a federalism summary impact statement. The 
regulations implementing Executive Order 12372 regarding 
intergovernmental consultation on Federal programs and activities do 
not apply to this amendment.

Executive Order 12866

    The Department of State does not consider this rule to be a 
``significant regulatory action'' under Executive Order 12866, section 
3(f), Regulatory Planning and Review. The Department is of the opinion 
that restricting defense articles exports is a foreign affairs function 
of the United States Government and that rules governing the conduct of 
this function are exempt from the requirements of Executive Order 
12866.

Executive Order 13563

    The Department of State has considered this rule in light of 
Section 1(b) of Executive Order 13563, dated January 18, 2011, and 
affirms that this regulation is consistent with the guidance therein.

Executive Order 12988

    The Department of State has reviewed the proposed amendment in 
light of sections 3(a) and 3(b)(2) of Executive Order 12988 to 
eliminate ambiguity, minimize litigation, establish clear legal 
standards, and reduce burden.

[[Page 28177]]

Executive Order 13175

    The Department of State has determined that this rulemaking will 
not have tribal implications, will not impose substantial direct 
compliance costs on Indian tribal governments, and will not pre-empt 
tribal law. Accordingly, the requirement of Section 5 of Executive 
Order 13175 does not apply to this rulemaking.

Paperwork Reduction Act

    The Department of State is of the opinion that this rule does not 
impose any new reporting or recordkeeping requirements subject to the 
Paperwork Reduction Act, 44 U.S.C. Chapter 35, but will provide a 
separate Federal Register notification regarding such requirements.

List of Subjects in 22 CFR Parts 120, 124, and 126

    Arms and munitions, Exports.

    Accordingly, for the reasons set forth above, Title 22, Chapter I, 
Subchapter M, parts 120, 124, and 126 are amended as follows:

PART 120--PURPOSE AND DEFINITIONS

0
1. The authority citation for part 120 continues to read as follows:

    Authority: Secs. 2, 38, and 71, Pub. L. 90-629, 90 Stat. 744 (22 
U.S.C. 2752, 2778, 2797); 22 U.S.C. 2794; E.O. 11958, 42 FR 4311; 
E.O. 13284, 68 FR 4075; 3 CFR, 1977 Comp. p. 79; 22 U.S.C. 2651a; 
Pub. L. 105-261, 112 Stat. 1920.


Sec. Sec.  120.33 through 120.38   [Reserved]

0
2. Add reserved Sec. Sec.  120.33 through 120.38 and Sec.  120.39 to 
read as follows:


Sec.  120.39  Regular employee.

    (a) A regular employee means for purposes of this subchapter:
    (1) An individual permanently and directly employed by the company, 
or
    (2) An individual in a long term contractual relationship with the 
company where the individual works at the company's facilities, works 
under the company's direction and control, works full time and 
exclusively for the company, and executes nondisclosure certifications 
for the company, and where the staffing agency that has seconded the 
individual has no role in the work the individual performs (other than 
providing that individual for that work) and the staffing agency would 
not have access to any controlled technology (other than where 
specifically authorized by a license).

PART 124--AGREEMENTS, OFF-SHORE PROCUREMENT AND OTHER DEFENSE 
SERVICES

0
3. The authority citation for part 124 continues to read as follows:

    Authority:  Sec. 2, 38, and 71, Pub. L. 90-629, 90 Stat. 744 (22 
U.S.C. 2752, 2778, 2797); E.O. 11958, 42 FR 4311; 3 CFR 1977 Comp. 
p. 79; 22 U.S.C. 2651a; 22 U.S.C. 2776; Pub. L. 105-261.


0
4. In Sec.  124.8, paragraph (5) is revised to read as follows:


Sec.  124.8  Clauses required both in manufacturing license agreements 
and technical assistance agreements.

* * * * *
    (5) The technical data or defense service exported from the United 
States in furtherance of this agreement and any defense article which 
may be produced or manufactured from such technical data or defense 
service may not be transferred to a foreign person except pursuant to 
Sec. Sec.  124.16 and 126.18, as specifically authorized in this 
agreement, or where prior written approval of the Department of State 
has been obtained.
* * * * *

0
5. Section 124.16 is revised to read as follows:


Sec.  124.16  Special retransfer authorizations for unclassified 
technical data and defense services to member states of NATO and the 
European Union, Australia, Japan, New Zealand, and Switzerland.

    The provisions of Sec.  124.8(5) of this subchapter 
notwithstanding, the Department may approve access to unclassified 
defense articles exported in furtherance of or produced as a result of 
a TAA/MLA, and retransfer of technical data and defense services to 
individuals who are dual national or third-country national employees 
of the foreign signatory or its approved sub-licensees, including the 
transfer to dual nationals or third-country nationals who are bona fide 
regular employees, directly employed by the foreign signatory or 
approved sub-licensees, provided they are nationals exclusively of 
countries that are members of NATO the European Union, Australia, 
Japan, New Zealand, and Switzerland and their employer is a signatory 
to the agreement or has executed a Non Disclosure Agreement. The 
retransfer must take place completely within the physical territories 
of these countries or the United States. Permanent retransfer of 
hardware is not authorized.

PART 126--GENERAL POLICIES AND PROVISIONS

0
6. The authority citation for part 126 continues to read as follows:

    Authority:  Secs. 2, 38, 40, 42, and 71, Pub. L. 90-629, 90 
Stat. 744 (22 U.S.C. 2752, 2778, 2780, 2791, and 2797); E.O. 11958, 
42 FR 4311; 3 CFR, 1977 Comp., p.79; 22 U.S.C. 2651a; 22 U.S.C. 
287c; E.O. 12918; 59 FR 28205, 3 CFR, 1994 Comp. p. 899; Sec. 1225, 
Pub. L. 108-375.


Sec. Sec.  126.16 and 126.17   [Reserved]

0
7. Add reserved Sec. Sec.  126.16 and 126.17 and Sec.  126.18 to read 
as follows:


Sec.  126.18  Exemptions regarding intra-company, intra-organization, 
and intra-governmental transfers to employees who are dual nationals or 
third-country nationals.

    (a) Subject to the requirements of paragraphs (b) and (c) of this 
section and notwithstanding any other provisions of this part, and 
where the exemption provided in Sec.  124.16 cannot be implemented 
because of applicable domestic laws, no approval is needed from the 
Directorate of Defense Trade Controls (DDTC) for the transfer of 
unclassified defense articles, which includes technical data (see Sec.  
120.6), to or within a foreign business entity, foreign governmental 
entity, or international organization that is an authorized end-user or 
consignee (including approved sub-licensees) for those defense 
articles, including the transfer to dual nationals or third-country 
nationals who are bona fide regular employees, directly employed by the 
foreign consignee or end-user. The transfer of defense articles 
pursuant to this section must take place completely within the physical 
territory of the country where the end-user is located, where the 
governmental entity or international organization conducts official 
business, or where the consignee operates, and be within the scope of 
an approved export license, other export authorization, or license 
exemption.
    (b) The provisions of Sec.  127.1(b) are applicable to any transfer 
under this section. As a condition of transferring to foreign person 
employees described in paragraph (a) of this section any defense 
article under this provision, any foreign business entity, foreign 
governmental entity, or international organization, as a ``foreign 
person'' within the meaning of Sec.  120.16, that receives a defense 
article, must have effective procedures to prevent diversion to 
destinations, entities, or for purposes other than those authorized by 
the applicable export license or other authorization (e.g., written 
approval or exemption) in order to comply with the applicable

[[Page 28178]]

provisions of the Arms Export Control Act and the ITAR.
    (c) The end-user or consignee may satisfy the condition in 
paragraph (b) of this section, prior to transferring defense articles, 
by requiring:
    (1) A security clearance approved by the host nation government for 
its employees, or
    (2) The end-user or consignee to have in place a process to screen 
its employees and to have executed a Non-Disclosure Agreement that 
provides assurances that the employee will not transfer any defense 
articles to persons or entities unless specifically authorized by the 
consignee or end-user. The end-user or consignee must screen its 
employees for substantive contacts with restricted or prohibited 
countries listed in Sec.  126.1. Substantive contacts include regular 
travel to such countries, recent or continuing contact with agents, 
brokers, and nationals of such countries, continued demonstrated 
allegiance to such countries, maintenance of business relationships 
with persons from such countries, maintenance of a residence in such 
countries, receiving salary or other continuing monetary compensation 
from such countries, or acts otherwise indicating a risk of diversion. 
Although nationality does not, in and of itself, prohibit access to 
defense articles, an employee who has substantive contacts with persons 
from countries listed in Sec.  126.1(a) shall be presumed to raise a 
risk of diversion, unless DDTC determines otherwise. End-users and 
consignees must maintain a technology security/clearance plan that 
includes procedures for screening employees for such substantive 
contacts and maintain records of such screening for five years. The 
technology security/clearance plan and screening records shall be made 
available to DDTC or its agents for civil and criminal law enforcement 
purposes upon request.

    Dated: April 26, 2011.
Ellen O. Tauscher,
Under Secretary, Arms Control and International Security, Department of 
State.
[FR Doc. 2011-11697 Filed 5-13-11; 8:45 am]
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